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Office of the President
TO MEMBERS OF THE COMMITTEE ON FINANCE:
DISCUSSION ITEM
For Meeting of November 17, 2010
ANNUAL REPORT ON NEWLY APPROVED INDIRECT COSTS AND DISCUSSION
OF THE RECOVERY OF INDIRECT COSTS FROM RESEARCH
This report discusses the indirect costs of research at the University of California, with a
particular focus on limitations to full indirect cost recovery. These limitations are twofold: the
assignment of low indirect cost rates and the granting of indirect cost waivers. As a result of
these limitations, the UC system incurs $600 million in unreimbursed indirect costs every year.
The University of California will have a difficult time keeping pace with peer institutions if it
must supply an increasing amount of the costs of research from its declining general funds and
fee revenues in absence of full indirect cost recovery.
BACKGROUND
The indirect costs of research (IDC), also known as overhead or as facilities and administrative
(F&A) costs, are the costs that UC campuses incur in the conduct of externally sponsored
research. Indirect costs are expenses that are shared across a large number of research projects.
Shared expenses include administrative services, the cost of laboratories, shared research
equipment, libraries, and the building maintenance, depreciation, and debt service taken on for
new construction to provide the researchers with modern facilities.
Indirect cost rates (ICR) determine the fraction of a grant or contract that represents shared costs
on average. These rates are applied to a portion of the direct costs called modified total direct
costs (MTDC). MTDC includes the salaries of researchers, their benefits, materials and supplies,
and the first $25,000 of each research sub-award. Excluded from MTDC are graduate fees,
research equipment, and the portion of sub-awards in excess of $25,000. ICR takes into account
both the facilities and administrative costs as described above. In an effort to keep indirect costs
down, the Federal government caps the administrative portion of the indirect cost rate at
26 percent of MTDC. i It is worth noting that this cap applies only to research grants and
contracts awarded to universities. Corporations and Federally Funded Research and
Development Centers (FFRDC) such as the Jet Propulsion Laboratory or the Sandia National
Laboratories are not affected by this cap. They generally have much higher rates of indirect cost
reimbursement than institutions of higher education.
i
The Federal government does not place an upper ceiling on the facilities component of indirect cost rates.
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November 17, 2010
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Most UC campuses derive the majority of their research funding from the National Institutes of
Health. As such their rates are governed by the Division of Cost Allocation (DCA) of the
Department of Health and Human Services. ii DCA sets the indirect cost rates for each campus
every three to five years by examining the costs incurred for research in the previous period. A
campus submits a rate proposal to the DCA with the total costs of facilities and administration
recently incurred, and the DCA performs an audit of those costs, often through a site visit to
establish its own assessment of reimbursable costs. The DCA subsequently decides the final rate
and informs the university (it is not a negotiation). This rate then applies to all new grants and
contracts going forward for the next three to five year period to recover expenses that have
already occurred.
In fiscal year 2011, the DCA assigned rates to UC campuses for on-campus research ranging
from 51.5 percent (UC Santa Barbara and UC Santa Cruz) to 54.5 percent (UC San Diego and
UC San Francisco), with intermediate rates for the other campuses. With these rates, the UC
system recovered $878 million in indirect cost reimbursement in FY 2010.
The rates of UC campuses are lower than those of many of their peers, substantially lower when
compared with private universities. For example, the University at Buffalo (SUNY) and the
University of Illinois Urbana-Champaign each have rates at 58.5 percent, and the University of
Massachusetts at Amherst and Virginia Tech are at 59 percent. The newest rates at Harvard and
MIT are 68 percent, Yale and Tufts are at 65.5 percent, and Stanford, Caltech, Princeton, and
Johns Hopkins have indirect cost rates in the range of 60 to 64 percent. Corporations and
FFRDCs normally have even higher rates, often exceeding 90 percent. For example, the
Gladstone Institute located in Mission Bay and affiliated with UCSF has an indirect rate of
92 percent, whereas the UC facilities in the same location with similar costs charge 54.5 percent.
The indirect cost rates assigned to UC campuses also are significantly lower than their proposed
rates. At some UC campuses, the assigned rates are nearly twenty points lower than the
proposed rates, reflecting a substantial disagreement with the DCA regarding allowable costs of
research - a problem that has historically applied to public universities and especially to those
assigned to the West Coast office of the DCA. The discrepancy between proposed and assigned
indirect cost rates of public universities audited by the DCA was recently called out by a report
from the Government Accountability Office (GAO) of the federal government as an area for
reform of government practices. iii In contrast, MIT’s proposed rate for 2011 was 68 percent, and
that was also their assigned rate (MIT negotiates its indirect cost rate with another federal
agency, the Office of Naval Research). State and local governments reimburse UC at lower rates
than the federal agencies, typically 26 percent or less, as a matter of longstanding policy. As a
result, the UC system as a whole incurs an estimated $300 million in unreimbursed indirect costs
every year representing the difference between the proposed and assigned rates of recovery.
The second major factor limiting the recovery of research costs is the allowance of indirect cost
waivers. Many foundations and other non-profit organizations reimburse few if any of the
ii
Universities that are mostly funded by the Department of Defense negotiate their indirect cost rates with the Office
of Naval Research.
iii
United States Government Accountability Office, University Research: Policies for the Reimbursement of Indirect
Costs Need to be Updated, September 2010.
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November 17, 2010
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indirect costs as a matter of policy, and some government sponsors require cost-sharing through
waivers to award research money. Waivers are approved exceptions to the DCA assigned
indirect cost rates.
The UC system grants individual and class waivers to a variety of sponsors: Federal agencies,
foundations, non-profits, corporations, and State and local governments. Individual waivers are
for specific awards. Class waivers are for a group of research grants and contracts from the same
sponsor. The class waivers are open-ended and apply to current as well as future awards. The
UC system currently has 1910 active class waivers. The two justifications for waivers are
sponsor policy, that is because the sponsors have a written policy in which they will not pay
indirect costs, or campus vital interest for individual research projects that the campuses deem to
be in their long-term interest to conduct.
Under-recovery of indirect costs through
waivers, FY2009
800
18%
700
%- percent
unrecovered
600
$ Millions
500
400
Unrecovered
300
Recovered
72%
200
27%
100
22%
30%
73%
69%
State
Other
government
Other
0
Federal
Foundation
and other
non profit
Business
Higher
Education
The number of indirect cost waivers grew significantly over the last twenty years. In fiscal year
1988, UC granted 164 indirect cost waivers. By fiscal year 2010, the number of waivers grew to
643. The growth is particularly noticeable for class waivers. Eighteen class waivers were
granted in fiscal year 1988, while 195 were granted in fiscal year 2010 – a growth by more than a
factor of ten over a twenty-year period. This rate of increase is much greater than the rate of
increase in sponsored research at UC which expanded by approximately a factor of four during
the same period. Indirect cost waivers have the cumulative effect of greatly reducing the
reimbursement of indirect costs incurred in the conduct of extramural research. It is estimated
that, in addition to losses coming from low indirect cost rates, UC has approximately
$300 million in unreimbursed indirect costs stemming from waivers every year. These costs
have to be met from other revenue streams such as UC general funds and fees.
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November 17, 2010
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Indirect cost waivers, FY1988-2010
700
600
500
400
Individual waivers
300
Class waivers
200
100
1987-88
1988-89
1989-90
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
0
It is important to emphasize that indirect costs are reimbursements for costs already incurred by
the university in the past applied to new grants and contracts. A common misperception is that
the reimbursement of indirect costs is a revenue stream, much like student fees or returns on
investments. In fact, the IDC funds that UC receives in any one year reimburse costs already
incurred conducting research for their sponsors in previous years. For this reason, there is no
restriction on how the university uses recovered IDC for its expenses.
Another common misperception is that high indirect cost rates make principal investigators less
competitive in their pursuit of Federal grants and contracts. In fact, the universities with the
highest rates also tend to be ranked as the best institutions for research. The figure below shows
the correspondence between the Academic Ranking of World Universities (Shanghai Jiao Tong)
and the indirect rates charged by each institution, with the general trend that the highest rates
correlate with the highest ranks by excellence of research. Reimbursement for the costs of
research is an important component of an institution’s ability to invest in its research enterprise
and its researchers. UC will have a difficult time keeping pace with its peers if it must supply an
increasing amount of the costs of research from its declining general funds and fee revenues in
absence of full indirect cost recovery.
COMMITTEE ON FINANCE
November 17, 2010
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Indirect cost rate and world rank of leading
American universities
Attachments:
1.
2.
3.
Newly Approved Indirect Cost Rates, FY 2010
Indirect Cost Rates of UC Campuses, FY 1995-2014
Indirect Cost Rates for On-Campus Research of AAU Universities, FY 2007-2014
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Attachment 1
Newly Approved Indirect Cost Rates, FY 2010
UC San Francisco
Previously approved rates for FY 2008-2009 were extended for three years through June 20, 2012, without any
changes in rates.
Previously
Approved Rates
Newly Approved Rates
FY 2008-09
FY 2009-10
FY 2010-11
FY 2011-12
Research Agreements
On-Campus
54.5
54.5
54.5
54.5
Off-Campus
26.0
26.0
26.0
26.0
On-Campus
43.2
43.2
43.2
43.2
Off-Campus
26.0
26.0
26.0
26.0
On-Campus
33.0
33.0
33.0
33.0
Off-Campus
26.0
26.0
26.0
26.0
General Clinical Research Centers
23.6
23.6
23.6
23.6
Intergovernmental Personnel Act
Agreements
9.2
9.2
9.2
9.2
Instruction Agreements
Other Sponsored Activity Agreements
UC San Diego
Changes in rates are shown in red.
Previously
Approved
Rates
FY 2007-08
Newly Approved Rates
FY 2008-09
FY 2009-10
FY 2010-11
FY 2011-12
FY 2012-13
FY 2013-14
Research Agreements
On-Campus
54.5
54.5
54.5
54.5
54.5
55.0
55.0
Off-Campus
26.0
26.0
26.0
26.0
26.0
26.0
26.0
On-Campus
53.0
53.0
53.0
53.0
53.0
53.0
53.0
Off-Campus
26.0
26.0
26.0
26.0
26.0
26.0
26.0
On-Campus
45.0
45.0
45.0
43.0
43.0
43.0
43.0
Off-Campus
Instruction Agreements
Other Sponsored Activity Agreements
26.0
26.0
26.0
26.0
26.0
26.0
26.0
Nimitz Marine Facility & Marine
Physical Laboratories
16.0
16.0
16.0
18.0
18.0
18.0
18.0
Intergovernmental Personnel Act
Agreements
9.0
10.3
10.3
10.3
10.3
10.3
10.3
Attachment 2
Indirect Cost Rates of UC Campuses, FY 1995-2014
On-Campus Sponsored Research Rates
FY
1995
FY
1996
FY
1997
FY
1998
FY
1999
FY
2000
FY
2001
FY
2002
FY
2003
FY
2004
FY
2005
FY
2006
FY
2007
FY
2008
FY
2009
FY
2010
FY
2011
Berkeley
49.5%
49.9%
49.9%
49.9%
50.4%
50.4%
50.4%
50.4%
51.5%
52.0%
52.0%
52.0%
52.0%
53.0%
53.0%
53.5%
53.5%
Davis
44.0%
44.5%
44.5%
44.5%
44.5%
46.0%
46.5%
48.0%
48.5%
48.5%
48.5%
51.5%
51.5%
52.0%
52.0%
53.0%
53.0%
Irvine
Los
Angeles
49.5%
49.9%
49.9%
49.9%
50.4%
50.4%
50.4%
50.4%
51.5%
51.5%
51.5%
52.5%
52.5%
52.5%
52.5%
53.0%
53.0%
49.0%
49.0%
49.0%
52.0%
52.0%
53.0%
53.0%
53.0%
52.5%
52.5%
53.5%
54.5%
54.5%
54.0%
54.0%
54.0%
54.0%
50.0%
50.0%
50.0%
52.0%
52.0%
52.0%
52.0%
52.0%
Merced
FY
2012
FY
2013
FY
2014
53.5%
54.0%
53.50%
Riverside
46.0%
46.0%
47.0%
47.0%
47.0%
47.5%
47.5%
47.5%
47.5%
47.5%
49.5%
49.5%
50.0%
50.0%
50.5%
52.0%
52.0%
52.0%
52.0%
San Diego
San
Francisco
Santa
Barbara
50.5%
51.0%
51.0%
51.5%
51.5%
51.5%
51.5%
52.0%
52.0%
52.0%
53.5%
54.0%
54.5%
54.5%
54.5%
54.5%
54.5%
54.5%
55.0%
44.5%
45.0%
47.0%
47.0%
47.5%
47.5%
47.5%
49.0%
50.5%
51.5%
51.5%
51.5%
53.5%
54.0%
54.5%
54.5%
54.5%
54.5%
45.5%
45.5%
45.5%
46.0%
46.0%
46.0%
46.0%
46.0%
47.5%
47.5%
47.0%
47.0%
51.0%
51.5%
51.5%
51.5%
51.5%
Santa Cruz
47.6%
47.6%
48.5%
48.5%
48.5%
49.0%
49.0%
49.0%
49.0%
49.0%
49.0%
49.0%
51.0%
51.0%
51.5%
51.5%
51.5%
Note: The indirect cost rates for Davis (FY2014), Los Angeles (FY2011), Merced (FY2011), and Santa Barbara (FY2011) are provisional.
55.0%
Attachment 3
Indirect Cost Rates for On-Campus Research of AAU Universities, FY 2007-2014
Cognizant
agency
FY 2007
FY 2008
FY 2009
FY 2010
FY 2011
Brandeis University
Private
vs.
public
Private
FY 2012
FY 2013
FY 2014
DHHS
N/A
N/A
N/A
58%
58%
Brown University
Private
DHHS
57.5%
59%
60%
61.5%
62%
California Institute
of Technology
Private
ONR
62%
60.5%
60.5%
62%
62%
Carnegie Mellon
University
Case Western
Reserve University
Private
ONR
47%
47%
47%
55.35%
55.35%
55.35%
55.35%
55.35%
Private
DHHS
54.5%
54.5%
57%
57%
57%
57%
60.3%
60.3%
61%
Columbia
University
Cornell University
Private
DHHS
61%
61%
Private
DHHS
53.5%
53.5%
54%
54%
54%
Duke University
Private
DHHS
55.5%
56%
56%
56%
57%
Emory University
Private
DHHS
53%
54.5%
55%
55%
55%
Georgia Institute of
Technology
Public
ONR
50.3%
51%
51%
51%
50.5%
Harvard University
Private
DHHS
66%
67%
67%
68%
68%
Indiana University
Public
DHHS
51.5%
54%
54%
54%
54%
Iowa State
University
Johns Hopkins
University
Massachusetts
Institute of
Technology
New York
University
Northwestern
University
Ohio State
University
Pennsylvania State
University
Public
DHHS
47%
48%
48%
48%
48%
48%
Private
DHHS
63.5%
64%
64%
64%
64%
64%
Private
ONR
65%
68%
68%
68%
68%
Private
DHHS
53%
53.5%
54%
54%
54%
Private
DHHS
51%
51%
52.5%
52.5%
52.5%
Public
DHHS
50%
50%
50%
52.5%
52.5%
Public
ONR
45%
47%
47.5%
48%
47.4%
57%
57%
64%
52.5%
Princeton
University
Purdue University
Private
DHHS
N/A
N/A
N/A
61%
61%
61%
Public
DHHS
52.5%
52.5%
52.5%
52.5%
54%
54%
54%
Rice University
Private
DHHS
51%
52.5%
52.5%
52.5%
52.5%
52.5%
52.5%
Rutgers University
Public
DHHS
54%
54.5%
54.5%
54.5%
54%
54%
Stanford University
Private
ONR
56.5%
58%
60%
60%
60%
Stony Brook
University - SUNY
Syracuse University
Public
DHHS
55%
55%
56%
56%
57%
Private
DHHS
47.5%
46%
46%
46%
46%
Texas A&M
University
Tulane University
Public
DHHS
45.5%
46.5%
46.5%
46.5%
46.5%
Private
DHHS
N/A
N/A
N/A
49%
50.5%
50.5%
50.5%
Public
DHHS
51%
51%
51%
51%
51.5%
51.5%
51.5%
Public
DHHS
58.5%
58.5%
58.5%
58.5%
58.5%
University of
Arizona
University of
Buffalo - SUNY
52.5%
1
Private
vs.
public
Private
Cognizant
agency
FY 2007
FY 2008
FY 2009
FY 2010
FY 2011
DHHS
53.5%
53.5%
56%
56%
56%
Public
DHHS
51.5%
51.5%
51.5%
51.5%
51.5%
University of
Florida
University of
Illinois, UrbanaChampaign
University of Iowa
Public
DHHS
45%
46.5%
47%
47%
47%
Public
ONR
53%
55%
58.5%
58.5%
58.5%
Public
DHHS
47.5%
50%
50%
50%
50%
University of
Kansas
University of
Maryland, College
Park
Public
DHHS
44%
46%
46%
46.5%
47%
Public
DHHS
48.5%
50%
50%
50%
50%
University of
Michigan
Public
DHHS
52%
52%
54.5%
54.5%
54.5%
University of
Minnesota, Twin
Cities
Public
DHHS
49.5%
51%
51%
51%
51%
University of
Missouri, Columbia
Public
DHHS
49.5%
49.5%
49.5%
51.5%
51.5%
51.5%
University of
Nebraska, Lincoln
Public
DHHS
47.5%
47.5%
47.5%
48.5%
48.5%
48.5%
University of North
Carolina, Chapel
Hill
University of
Oregon
University of
Pennsylvania
Public
DHHS
46%
46%
47.5%
48%
48%
48%
Public
DHHS
48%
48%
42%
42%
42%
Private
DHHS
57%
57.5%
57.5%
59%
60%
University of
Pittsburgh
Private
DHHS
48.5%
48.5%
51.5%
51.5%
51.5%
University of
Rochester
Private
DHHS
N/A
54%
54%
54%
53%
University of
Southern California
Private
DHHS
63%
63%
63%
63%
62%
University of Texas,
Austin
Public
DHHS
50%
52%
52%
52%
53.5%
University of
Virginia
Public
DHHS
51.5%
51.5%
51.5%
54%
54%
University of
Washington
Public
DHHS
55.5%
56%
56%
56%
56%
University of
Wisconsin,
Madison
Vanderbilt
University
Public
DHHS
47%
48.5%
48.5%
48.5%
48.5%
Private
DHHS
53%
53.5%
53.5%
55%
55%
Washington
University in St.
Louis
Yale University
Private
DHHS
52.5%
52%
52%
52%
52%
Private
DHHS
65%
65%
65.5%
65.5%
65.5%
University of
Chicago
University of
Colorado, Boulder
FY 2012
FY 2013
FY 2014
52.5%
52.5%
51%
51%
51%
55.5%
55.5%
55.5%
54%
54%
54.5%
52%
52%
60%
54.5%
2